Does foreign state immunity "trump" issue estoppel in the English courts?

In Hulley Enterprises Limited and others v The Russian Federation¹, the English High Court has, for the first time, found that issue estoppel based on a foreign judgment is available against a foreign state. This landmark decision arose from the Yukos Oil saga, which is now set to proceed in the English courts after the Russian Federation's claim to state immunity failed.

 

Key takeaways

• In November 2023, the English High Court determined two preliminary issues in favour of the former majority shareholders of OAO Yukos Oil Co. (Yukos), paving the way for their attempt to enforce arbitral awards totalling over USD50 billion (Awards) against the Russian Federation (Russia) in England.
• The Court found that the common law doctrine of issue estoppel barred Russia from re-arguing in England the question of whether it had agreed in writing to submit the relevant disputes to arbitration, as the Dutch courts had already finally and conclusively determined the same issue. This was despite the general protection afforded to Russia by the law of state (or "sovereign") immunity, which is applied in England under the State Immunity Act 1978 (SIA 1978).
• The case clarifies how issue estoppel based on a foreign judgment interrelates with state immunity and specifically the SIA 1978. It also highlights the potential benefits and pitfalls of waging a legal battle in multiple jurisdictions simultaneously.

 

Background

The case is another instalment in the blockbuster dispute that arose in the early 2000s when Russia seized Yukos, which was once the country's largest oil company. The Awards issued by an arbitral tribunal in 2014 determined that, by seizing Yukos, Russia had breached its obligations under the Energy Charter Treaty and was liable to pay the former Yukos majority shareholders’ (the Shareholders) a record-breaking damages bill. Russia sought to have the Awards set aside in the courts of the Netherlands (the arbitral seat). Following a drawn-out court battle, the Dutch courts have now finally (and fully) rejected Russia's challenge of the Awards.

In parallel, the Shareholders had commenced proceedings in England for recognition and enforcement of the Awards. In these proceedings, Russia had contested the English court's jurisdiction based on the immunity it claimed under section 1 of the SIA 1978. In response, the Shareholders argued that, as Russia had agreed in writing to arbitrate the dispute that was the subject of the Awards, Russia's immunity would be lost pursuant to the exception in section 9 of the SIA 1978, which applies to proceedings related to a valid arbitration agreement.

 

Decision

In the event, the English court was tasked with deciding (1) whether, because of the Dutch courts' judgments, Russia was barred from re-arguing the question of whether it had agreed in writing to submit the dispute to arbitration; and (2) if so, whether Russia's application challenging the English court's jurisdiction should be dismissed.

The Court's answer to each question was "yes".

In a nutshell, the Judge determined that the Dutch courts had already finally and conclusively determined the question of the validity of the arbitration agreement in the Shareholders' favour — that is, that the Awards had been issued pursuant to proceedings commenced under a valid arbitration agreement (in writing). Accordingly, an issue estoppel precluded Russia from re-arguing the same question in the Shareholders' enforcement proceedings in the English court. It followed from the outcome of the Dutch proceedings that section 9 of the SIA 1978 was engaged, meaning that Russia was not immune from the English court's jurisdiction to adjudicate the Shareholders' enforcement action and Russia's application should therefore be dismissed.

 

Significance

The Court had to wade into uncharted legal territory to reach its decision. Although it was not contentious that foreign judgments can result in issue estoppel, there was no previous case in which an issue estoppel based on a foreign judgment had been found against a foreign state.² Accordingly, the Court had to determine whether or not it had a freestanding duty to consider afresh the merits of Russia's claim to state immunity, irrespective of any final and binding determination of a foreign court in respect of the same underlying issue.

The Court found nothing in the SIA 1978 that would make issue estoppel inapplicable. It also did not consider it necessary that the Shareholders first apply under section 31 of the Civil Jurisdiction and Judgments Act 1982 for formal recognition and enforcement of the Dutch courts' judgments. So long as the foreign judgment would qualify for recognition and enforcement (as the Court found the Dutch courts' judgments did in this case), issue estoppel would be available. The Court concluded that "there is no reason why, if the relevant hurdles are cleared, there cannot be an issue estoppel arising out of a foreign judgment against a state, just as there can be against an ordinary company or individual." However, the Court noted that, even if those hurdles are cleared, it may sometimes be inappropriate to uphold a plea of issue estoppel because of "special circumstances" — but these did not exist here.

 

Comment

The case holds important lessons for governments and businesses alike:

• Governments and their legal advisors have been put on notice that state immunity will not "trump" the doctrine of issue estoppel in English courts. Instead, an English court may consider whether an issue estoppel arises in the normal process of applying English law to determine a state's claim to immunity under the SIA 1978, including whether any exceptions to immunity apply.

A state that loses a foreign-seated arbitration may seek to have the award set aside by the courts of the arbitral seat. But if that fails, the state may later find itself precluded from re-arguing the same points when asserting state immunity in respect of a claimant's subsequent action to enforce the award in England.

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¹ [2023] EWHC 2704 (Comm)
² The Court noted two previous cases that implicitly recognised the possibility of an issue estoppel against a state: Dallah v Pakistan [2011] 1 AC 763 and Diag Human SE v Czech Republic [2014] EWHC 1639 (Comm).